What effect do property taxes have on homeowners’ associations? There are a few common property tax issues that associations may face.
Property Taxes on Association Common Area
In Arizona, planned communities own portions of common area. The common area is usually deeded to the Association from the Declarant upon turnover. As the owner, in addition to the maintenance and upkeep of those areas, the association is responsible for paying the property taxes on the parcels of common area.
Typically, an association can combine all parcels of common area and request that the County Assessor value those parcels as “Residential Common Area.” Each common area parcel that is classified and valued as such is valued at $500.00 and assessed at 10%, which is much lower than the property would otherwise be assessed.
But what happens if an association does not pay the property taxes owed on common area parcels?
When property taxes are unpaid, the State auctions off tax liens for any parcels with unpaid taxes owed – including Residential Common Area. The tax lien auction occurs in February each year (auctioning the taxes for the previously preceding year). The auction price is the amount of taxes due plus interest. The winning bidder is the one who submits a bid for the lowest interest rate. The winning bidder receives a “tax lien,” which it may foreclose upon in the future.
A tax lien holder may foreclose on its tax lien after three years from the date the lien was sold. Tax liens expire after ten years from the sale date. If the tax lien holder files a foreclosure lawsuit and the taxes are not paid, the tax lien holder receives a Treasurer’s Deed – and that lien holder becomes the owner of that parcel of common area.
Tax Liens Against Owners’ Property
The other common context where tax liens may affect associations are unpaid property taxes owed on an owner’s property within the Association.
Under Arizona law, associations have a contractual and statutory lien for unpaid Assessments and other amounts. This means that if an owner fails to pay Assessments owed to the association, the association may collect the amounts by foreclosing on its Assessment Lien.
There are only a few types of encumbrances that have priority over an association’s Assessment Lien, and tax liens recorded against the Property are one of those categories.
That means that if an owner fails to pay one or more years of property taxes for his or her Lot – a tax lien holder may foreclose on its tax liens for one or more of those years and become the Owner of that property. The state auctions off tax liens for individual owners’ properties by the same process outlined above.
If a tax lien holder moves to foreclose on its lien – the association’s Assessment Lien stands to be extinguished if the foreclosure is successful. This means that the association’s lien would be “wiped out,” and the association would likely be limited to collecting delinquent amounts from the owners personally.
If the association would like to ensure that its lien is not extinguished in that context, it can “redeem,” or pay the outstanding amount of taxes owed on the property secured by the foreclosing tax lien holder. Note that paying the outstanding amount of taxes and interest does not affect the title to the property – it merely extinguishes the tax lien against the property. The individual owner remains the owner of the property and the association’s lien remains in place.